Below are analyst updates on our thirteen current high-conviction long and short ideas. Please note we added Visa (V) to the long side of Investing Ideas this week and removed Beyond Meat (BYND) from the short side and Anthem (ANTM) from the long side. We will send a separate email with Hedgeye CEO Keith McCullough's refreshed levels for each ticker.
IDEAS UPDATES
GIL
Click here to read our analyst's original report.
Biggest beneficiary of the exodus to Western Hemisphere manufacturing and stepped up private label contracts by mass retailers. In ‘capacity growth mode’ to facilitate much more robust top line, which plays out starting in 2H.
In Gildan’s case management cited later fleece shipments in Q4 as the reason for the change. Gildan is still ramping up production of fleece as it modifies what each plant manufactures now that the latest Rio Nance 6 plant is operating. Fleece has higher margins than t-shirts, because the selling price is considerably more than the additional cost of cotton and sewing costs are about the same. Despite the concerns the set up for the stock may be better with lower near term expectations for Q3 followed by an analyst day that focuses on the company’s growth prospects shortly afterwards.
Ultimately, GIL is teeing up for a big acceleration in top line in 4Q, which should sustain into 2020 and 2021, more than tripling the EPS growth rate we’ve seen over the past five years.
V
Hedgeye CEO Keith McCullough is adding Visa (V) to the long side of Investing Ideas. Below is a brief note.
The Machine is just pounding on the "Secular Growers" (Software Stocks in particular, which we agree with), so we're going to register a rare immediate-term TRADE #oversold signal within Visa's (V) Bullish @Hedgeye TREND.
Here's Josh Steiner's recent recap of what was an awesome quarter:
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Visa posted another round of solid results in the third quarter of its fiscal year, highlighted by +11.5% Y/Y, above-consensus growth in net revenues and an expanded core operating margin. Service, data processing, and international revenues of $2.41B, $2.66B, $1.98B grew +9.5%, +12.8%, and +8% Y/Y, coming in +1.7%, -0.3%, and +0.51% relative to street estimates, respectively. Other revenues of $342M grew by +49%, surpassing street estimates by +8%. In addition, client incentives of $1.55B, although up +12.5% Y/Y and one percentage point higher than gross revenue growth, registered -5% below consensus, with the contra-revenue figure accounting for 20.93% of gross revenues. Operating expenses were -18% lower Y/Y, driven entirely by the $600M litigation provision taken in the prior year quarter. Excluding the -99.8% decline in litigation provision, operating expenses grew by +10% Y/Y. Accordingly, core operating margin, measured as EBIT ex. litigation provision and irregular/infrequent items, came in at 52.92%, marking a +0.39% linked-quarter and +0.23% Y/Y expansion. As a result, operating income increased by +35% Y/Y, with pretax income rising by +37.5% as a result of a lower interest expense, and net income rising by +33% following a higher tax provision. In sum, diluted GAAP and Non-GAAP EPS of $1.37 grew by +37% Y/Y, aided by a -2.5% Y/Y reduction in the weighted-average share count and ahead of street estimates for $1.32. Furthermore, during the quarter, Visa generated free cash flow of $2.6B, returning $2.7B to investors through share repurchases of $2.1B, or 12.9MM shares, and dividends of $565MM. |
TSLA
Click here to read our analyst's original report.
Used car prices listed by Tesla (TSLA) have also been slashed, and beyond the moves around the shareholder meeting. The divergence we flagged between Tesla’s own used vehicle prices and those on independent sites has evaporated in just the last month or so. After such a long period of little interesting used pricing activity, 3Q19 has been busy.
Model 3 U.S. test drives have only averaged down about 15% quarter to date. Pricing actions look less targeted at demand stimulation, although introductions of cheaper variants has often had a similar effect.
ROL
Click here to read our analyst's original report.
The current share price of Rollins makes little sense to us, and we expect a significant downward revaluation by the market.
Margin gains have stalled amid increasing competitive intensity in a mature, slow growing market. Attractive markets for growth and acquisitions present less runway and higher transaction prices.
With GDP-type organic growth rates, housing headwinds, competitive entry, and a feuding family with a controlling stake, one would reasonably expect ROL to trade at a discount to the market. We expect a growth deceleration, consolidation of leases, a host of yellow/red flags, and broader coverage to generate >50% downside, as the S&P 500 addition premium fades from the share price.
DVA
Click here to read our analyst's original report.
We think trends in commercial patient volume, reimbursement, and margins are coming under pressure alongside regulatory problems. We see significant downside over the next 12-months for DaVita (DVA), which has little flexibility and apparently no plan except for repurchasing stock.
Downside from commercial enrollment and reimbursement mix, high fixed costs, and few opportunities for margin expansion gives us high conviction with DVA as a Best Idea Short.
NFLX
Click here to read our analyst's original report.
From a fundamental perspective, the timing of our Macro team's Quad 4 call (i.e. U.S. Growth and Inflation slowing) lines up well with our Netflix (NFLX) short. NFLX is a high-beta, high-multiple, leveraged growth stock.
Furthermore, in 2Q19, NFLX reported the largest net paid subscriber miss since 2016. The weakness was broad-based, with gross subscriber additions missing management's forecast "across all regions" and the U.S. paid subscriber base declining QoQ for the first time in the company's streaming history. Meanwhile, management's 3Q19 global paid net subscriber guidance of 7.0 million looks aggressive and likely sets the stage for another disappointment later in the year. Overall, we believe this is the beginning of the end for the NFLX growth story.
For a refresher on our Netflix call, check out Communications analyst Andrew Freedman's 49-minute presentation from April outlining his NFLX short thesis (along with analysis of his Pinterest (PINS) long call). CLICK HERE to watch.
NSP
Click here to read our analyst's original report.
Insperity (NSP), a 1H19 best ideas short addition for Jay Van Sciver, was similarly overvalued into 2Q19 earnings despite slowing employment growth and decades of volatile results following tax legislation. As we understand it, three years of accelerating GDP growth let these divergences widen and fester; in recent months, decelerating growth has been cleaning them out, often abruptly.
With steep comps, intensifying competition, slowing growth, and a lack of incremental tailwinds, investors will likely be just as surprised by the cyclical downside as they were by the post-GFC recovery.
MAR
Click here to read our analyst's original report.
A number of outlets recently reported that Marriott International's (MAR) Global Marketing Officer, Karin Timpone is set to resign at year end. We’d note that this all comes at an interesting time given the Bonvoy launch earlier this year and Marriott’s intent to invest heavily in marketing and awareness; remember the investor day?
Of course, there are always reasons behind resignations that we’re not privy to, but the timing of the announcement is just a bit odd to us. We have heard across the industry that consumers are not exactly ecstatic with the offerings and hoteliers have had their issues with the integration – of course there are growing pains and a program of such scale (133 million global members) will take time to get right, but this issues come a bad time for a stock that is not inexpensive, and a company that is lagging in a soft industry.
GOOS
Click here to read our analyst's original report.
Part of the bull case for Canada Goose (GOOS) is the revenue growth opportunity of opening more stores in key markets globally, likely following a similar cadence to Moncler. However the nature of the product is so different and the life is so long that this will make comp growth difficult for the stores. We see some evidence that the stores could be comping down already still early in the opening/maturity curve (chart below). New stores may help grow revenue in aggregate, but the risk is if the stores aren’t comping you a stuck with fixed costs for the duration of the lease on meaning margin pressure when rev per box is not growth. Again the line we think the street has wrong in the GOOS long term model is margins. The margin structure has to decline in order to grow revenue the way the company is planning.
APY
Click here to read our analyst's original report.
Apergy (APY) Not Immune from a Deteriorating Environment….. The Lower 48 operating environment continues to weaken around APY. The Drilling Technologies segment is highly sensitive to the rig count, which it demonstrated again in the quarter as revenue declined (9%) sequentially while the Lower 48 rig count declined (5%) sequentially. Currently, the number of operating rigs stands 5% below the number of rigs operating 3 months ago. The Production & Automation Technologies segment is more correlated to well completions than rig count. Completions remained resilient in 1H19, specifically in oily plays (Bakken, Eagle Ford & Permian) where the number of completed wells grew 11% YoY. However that growth is showing signs of a potential stalling out, as evidenced by a marked decline in the number of active frac crews which are a forward indicator for completions. 80% of APY’s revenue stream is tied to the macro factors at play in the US onshore market.
PENN
Penn National Gaming's (PENN) remains a top short idea for our Gaming, Lodging & Leisure (GLL) analyst Todd Jordan. Demographic headwinds will keep same store revenues flat at best in most regional gaming markets. With cost cutting and marketing efficiencies mostly met, profits will likely decline.
APHA
Click here to read the short Aphria (APHA) stock report Cannabis Analysts Howard Penney and Shayne Laidlaw sent Investing Ideas subscribers earlier this week.
CMI
While we get the bull arguments for Cummins (CMI), from aftermarket to emerging markets, we see too many business and narrative headwinds going into 2020. Cyclicals have a way of genuinely looking ‘cheap’ when in fact expensive; we think shares of CMI are pricier than longs believe.
A deceleration in activity may adversely impact the profitability of suppliers to capital equipment makers. Added to short-term and long-term structural headwinds, as well as fewer emission-related content opportunities in CMI’s key North American market, the next couple of years may prove unusually challenging for CMI. We think the shares have >40% downside risk, with catalysts ranging from truck order backlog drawdowns to high decremental margins in key engine markets.
